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How well do ETFs mirror their indexes?

What we're looking at

The performance over the past two years of exchange-traded funds that track the broad bond market and real-return bonds (they offer inflation protection), as well as a couple of alternative investment categories: emerging markets and real estate investment trusts.

Our chart

The ETF analysis team at National Bank Financial compiled numbers not only on returns, but also on how well each ETF functioned as an index-tracker. The traditional ETF is an investing vehicle that ideally delivers the returns of a target stock or bond index minus fees. Here are some definitions of key terms to help you understand this chart:

Excess return: The ETF's return minus the return of the underlying index. Ideally the excess return is equal to the cost of owning an ETF, as measured by the management fee.

Premium/discount to NAV: Shows the extent to which the share price of an ETF deviates from the net asset value per share. Zero premium or discount is preferable, but trading patterns for an ETF and its underlying holdings can cause the net asset value and share price to wander apart.

For premium/discount to NAV, a mean and a volatility level have been provided. The mean takes daily premium/discount numbers and uses them to produce an average number, while the volatility level shows you how much the premium or discount tends to bounce around. Lower volatility is better.

What we found

The bond ETF that does the best job of tracking its index appears to be the iShares DEX Universe Bond Index Fund, which also happens to be the largest bond ETF as measured by assets. Note that the Claymore Advantaged Canadian Bond ETF is designed for non-registered accounts and uses derivatives to provide a more tax-efficient return than standard bond funds. This structure may contribute to the higher level of excess returns.



ReturnsPrem./Disc. to NAVReturnsPrem./Disc. to NAV
Period Period
Broad Market Bond ETFs
iShares DEX Universe BondXBB-T0.30%9.38%-0.30%0.02%0.11%6.35%-0.40%0.04%0.21%
BMO Aggregate BondZAG-T0.28%9.10%-0.67%0.19%0.19%N.A.N.A.0.36%0.25%
Claymore Advantaged Canadian BondCAB-T0.30%6.85%-1.99%0.14%0.29%5.23%-0.97%0.29%0.15%
DEX Universe Bond Index 9.67%6.74%
Real Return Bond ETFs
iShares DEX Real Return BondXRB-T0.35%17.87%-0.48%0.09%0.33%10.65%-0.44%0.10%0.38%
BMO Real Return BondZRR-T0.25%17.83%-0.28%0.24%0.36%N.A.N.A.0.25%0.45%
DEX Real Return Bond Index 18.35%11.09%
Emerging Markets
Claymore BRICCBQ-T0.60%-22.51%-1.70%-0.05%0.24%8.78%-2.85%0.01%0.17%
BMO Emerging Markets EquityZEM-T0.54%-17.09%0.22%0.46%0.53%11.90%-3.39%0.56%0.60%
Claymore Broad Emerging MarketsCWO-T0.65%-20.98%-2.55%0.00%0.43%16.16%-2.72%0.06%0.27%
iShares MSCI Emerging MarketsXEM-T0.82%-17.09%-0.49%0.01%0.38%10.02%-1.90%0.11%0.42%
MSCI Emerging Markets Index -16.59%11.92%
Real Estate Investment Trusts
iShares S&P/TSX Capped REITXRE-T0.55%20.95%-0.72%0.02%0.15%21.89%-0.72%0.01%0.20%
BMO Equal Weight REITsZRE-T0.55%13.92%-0.59%0.11%0.18%N.A.N.A.0.17%0.21%
S&P/TSX Capped REIT Index 21.67%22.61%
Source: National Bank Financial

© 2007 The Globe and Mail. All rights reserved.

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